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POOL CORPORATION

(POOL)
  Report
Delayed Nasdaq  -  04:00 2022-09-23 pm EDT
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POOL CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/28/2022 | 12:53pm EDT
You should read the following discussion in conjunction with the accompanying
interim Consolidated Financial Statements and notes, the Consolidated Financial
Statements and accompanying notes in our 2021 Annual Report on Form 10-K and
with Management's Discussion and Analysis in our 2021 Annual Report on
Form 10-K.

For a discussion of our base business calculations, see the Results of Operations section below.

Forward-Looking Statements


This report contains forward-looking information that involves risks and
uncertainties. Our forward-looking statements express our current expectations
or forecasts of possible future results or events, including projections of
earnings and other financial performance measures, statements of management's
expectations regarding our strategic, operational and capital allocation plans
and objectives and industry, general economic and other forecasts of trends and
other matters. Forward-looking statements speak only as of the date of this
filing, and we undertake no obligation to publicly update or revise such
statements to reflect new circumstances or unanticipated events as they
occur. You can identify these statements by the fact that they do not relate
strictly to historic or current facts and often use words such as "anticipate,"
"estimate," "expect," "intend," "believe," "will likely result," "outlook,"
"project," "may," "can," "plan," "target," "potential," "should" and other words
and expressions of similar meaning.

No assurance can be given that the expected results in any forward-looking
statement will be achieved, and actual results may differ materially due to one
or more factors, including impacts on our business from the COVID-19 pandemic
and the extent to which strong demand driven by home-centric trends will
continue, accelerate or reverse; the sensitivity of our business to weather
conditions; changes in the economy; consumer discretionary spending; the housing
market or inflation rates; our ability to maintain favorable relationships with
suppliers and manufacturers; competition from other leisure product alternatives
or mass merchants; our ability to continue to execute our growth strategies;
excess tax benefits or deficiencies recognized under ASU 2016-09 and other risks
detailed in our 2021 Annual Report on Form 10-K. For these statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995.

OVERVIEW

Financial Results


Net sales increased 15% in the second quarter of 2022 to $2.1 billion compared
to $1.8 billion in the second quarter of 2021. Base business sales grew 10%. Our
results are indicative of healthy demand for our products as maintenance,
replacement, refurbishment and construction activity remained strong. Net sales
benefited approximately 10% to 11% from elevated price inflation, but were
unfavorably impacted 1% from currency exchange rate fluctuations.

Gross profit increased 21% to $666.8 million in the second quarter of 2022 from
$551.7 million in the same period of 2021. Base business gross profit improved
14% over the second quarter of 2021. Gross margin increased 150 basis points to
32.4% in the second quarter of 2022 compared to 30.9% in the second quarter of
2021, reflecting benefits from our supply chain initiatives, increased pricing
and recent acquisitions. Base business gross margin increased 100 basis points.

Selling and administrative expenses (operating expenses) increased 16% to $247.9
million in the second quarter of 2022 compared to $213.1 million in the second
quarter of 2021, including a 1% benefit from currency exchange rate
fluctuations. As a percentage of net sales, operating expenses increased to
12.1% in the second quarter of 2022 compared to 11.9% in the same period of
2021. Our operating expenses have increased to support our business growth,
including recent acquisitions.

Operating income in the second quarter of 2022 increased 24% to $418.9 million
compared to $338.6 million in the same period of 2021. Operating margin was
20.4% in the second quarter of 2022 compared to 18.9% in the second quarter of
2021. Base business operating margin was 20.3%, up 130 basis points from the
prior year period.

We recorded a $1.6 million, or $0.04 per diluted share, tax benefit from
Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based
Payment Accounting, in the quarter ended June 30, 2022, compared to a tax
benefit of $7.7 million, or $0.19 per diluted share, realized in the same period
of 2021.

                                       14
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Net income increased 18% to $307.3 million in the second quarter of 2022
compared to $259.7 million in the second quarter of 2021. Earnings per diluted
share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in
the same period of 2021. Without the impact from ASU 2016-09 in both periods,
earnings per diluted share increased 23% to $7.59 in the second quarter of 2022
compared to $6.18 in the second quarter of 2021. See RESULTS OF OPERATIONS below
for definitions of our non-GAAP measures and reconciliations of our non-GAAP
measures to GAAP measures.

On May 4, 2022, our Board of Directors (our Board) authorized an additional $196.2 million under our share repurchase program bringing its total authorization available to $600.0 million. Further, the Board announced a 25% increase over the previous quarterly dividend amount to $1.00 per share.

References to product line and product category data throughout this report generally reflect data related to the North American swimming pool market, as this data is more readily available for analysis and represents the largest component of our operations.

COVID-19 Pandemic


We continue to monitor the ongoing impact of the COVID-19 pandemic, including
the effects of recent notable variants of the virus. The health, safety and
security of our employees and the communities in which we operate remain our
highest priority. We implemented enhanced hygiene and sanitation practices at
our sales centers and at our corporate offices in 2020, and we continue to
evaluate and maintain them where necessary.

Beginning in the second quarter of 2020, we experienced unprecedented demand as
families spent more time at home and sought out opportunities to create or
expand home-based outdoor living and entertainment spaces. While this trend has
had a positive impact on our financial performance over the past couple of
years, it is unclear what the long-term impact will be.

Our industry experienced supply chain constraints in 2021. In response, we have
been proactive in making significant investments in inventory to enable us to
continue to meet strong customer demand and position ourselves to provide
exceptional customer service through the 2022 swimming pool season. While we
were challenged by supply chain constraints through the first half of 2022, we
have observed improvements in our supply chain dynamics beginning in the second
quarter of 2022. These trends, caused in large part from global disruptions
related to the COVID-19 pandemic, may persist in the near-term.

We expect the impact of the pandemic on our business and financial results in
2022 will continue to vary by location and depend on numerous evolving factors
that we are unable to accurately predict. These factors include the duration and
scope of the pandemic, global economic conditions during and after the pandemic,
the possible re-institution of governmental restrictions on the activities of
our customers, vendors or employees, the possibility of additional subsequent
outbreaks, the sustainability of current home-centric trends and other changes
in customer and supplier behavior in response to the pandemic.

Financial Position and Liquidity


As of June 30, 2022, total net receivables, including pledged receivables,
increased 29% compared to June 30, 2021, primarily driven by our sales growth
and recent acquisitions. Our days sales outstanding (DSO), as calculated on a
trailing four quarters basis, was 27.2 days at June 30, 2022 and 25.8 days at
June 30, 2021. Our allowance for doubtful accounts balance was $6.5 million at
June 30, 2022 and $5.4 million at June 30, 2021.

Net inventory levels increased 77% compared to levels at June 30, 2021. We
increased our purchasing beginning in the second half of 2021 to improve our
customer experience and minimize the impact of longer lead times from our
vendors. Our inventory balance also reflects impacts from inflation and recent
acquisitions. Our inventory reserve was $20.9 million at June 30, 2022 and $15.2
million at June 30, 2021. Our inventory turns, as calculated on a trailing four
quarters basis, were 2.8 times at June 30, 2022 and 4.1 times at June 30, 2021.
Our inventory turns have averaged 3.4 times over the past five years.

Total debt outstanding at June 30, 2022 was $1.6 billion compared to $423.1 million at June 30, 2021. Our debt balance has increased between periods as we have utilized debt proceeds to fund investments in working capital, recent acquisitions and share repurchases.

Current Trends and Outlook


For a detailed discussion of trends through 2021, see the Current Trends and
Outlook section of Management's Discussion and Analysis included in Part II,
Item 7 of our 2021 Annual Report on Form 10-K.

                                       15
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We are updating our annual earnings guidance range to include the $0.04 tax
benefit from ASU 2016-09 recognized in the second quarter of 2022. We expect
2022 diluted EPS of $18.38 to $19.13, including the impact of year-to-date tax
benefits of $0.22. Our previous earnings guidance range disclosed in our First
Quarter 2022 Report on Form 10-Q was $18.34 to $19.09. Our earnings guidance
range assumes average weather conditions.

We expect sales growth for the full year in the range of 17% to 19% as
previously disclosed in our 2021 Annual Report on Form 10-K. We project 2022
inflationary product cost increases of approximately 10% to 11% (compared to 7%
to 8% in 2021).

Our gross margin trends depend on the amounts and timing of inflationary product
cost increases, sales growth expectations and product mix. We expect a slight
improvement in gross margin for the full year of 2022 compared to the full year
of 2021 given the impact of inflation in the first half of the year. Compared to
2021 periods, we project declines in the latter half of the year.

We project our operating expense growth rate in 2022 will be less than our gross
profit growth rate. We expect that our operating expense growth will reflect
inflationary increases and incremental costs to support our investment
initiatives, including increased investments in our digital transformation
initiatives and expansion of our sales center network. We also expect increased
expenses from tight labor and real estate markets in 2022, which are heightened
focus areas in our expense management.

We project that our annual effective tax rate (without the benefit from ASU
2016-09) for 2022 will approximate 25.5%. We expect our effective tax rate will
fluctuate from quarter to quarter due to ASU 2016-09, particularly in periods
when employees elect to exercise their vested stock options or when restrictions
on share-based awards lapse. We recorded a $8.9 million, or $0.22 per diluted
share, tax benefit from ASU 2016-09 for the six months ended June 30, 2022. We
may recognize additional tax benefits related to stock option exercises in 2022
from grants that expire in future years. We have not included any expected tax
benefits in our guidance beyond what we have recognized as of June 30, 2022.

We expect to continue to use cash to fund opportunistic share repurchases through the remainder of 2022 and to use cash for the payment of cash dividends as and when declared by our Board.


The forward-looking statements in the foregoing section are based on current
market conditions, speak only as of the filing date of this report, are based on
several assumptions, and are subject to significant risks and uncertainties. See
"Cautionary Statement for Forward-Looking Statements."

RESULTS OF OPERATIONS

As of June 30, 2022, we conducted operations through 416 sales centers in North America, Europe and Australia. For the six months ended June 30, 2022, approximately 95% of our net sales were from our operations in North America.

The following table presents information derived from the Consolidated Statements of Income expressed as a percentage of net sales:

                                                                    Three Months Ended                             Six Months Ended
                                                                         June 30,                                      June 30,
                                                                2022                   2021                   2022                   2021
Net sales                                                         100.0  %               100.0  %               100.0  %               100.0  %
Cost of sales                                                      67.6                   69.1                   67.9                   70.1
Gross profit                                                       32.4                   30.9                   32.1                   29.9
Selling and administrative expenses                                12.1                   11.9                   13.2                   13.5

Operating income                                                   20.4                   18.9                   18.9                   16.4
Interest and other non-operating expenses, net                      0.4                    0.1                    0.4                    0.2
Income before income taxes and equity in earnings                  20.0  %                18.8  %                18.5  %                16.3  %

Note: Due to rounding, percentages presented in the table above may not add to Operating income or Income before income taxes and equity in earnings.

We have included the results of operations from acquisitions in 2022 and 2021 in our consolidated results since the acquisition dates.

                                       16
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Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021


The following table breaks out our consolidated results into the base business
component and the excluded component (sales centers excluded from base
business):

(Unaudited)                                    Base Business                            Excluded                                 Total
(in thousands)                              Three Months Ended                     Three Months Ended                     Three Months Ended
                                                 June 30,                               June 30,                               June 30,
                                         2022                 2021                2022              2021               2022                 2021
Net sales                           $ 1,963,974          $ 1,782,894          $  91,844          $ 4,939          $ 2,055,818          $ 1,787,833

Gross profit                            625,843              550,509             40,961            1,176              666,804              551,685
Gross margin                               31.9  %              30.9  %            44.6  %          23.8  %              32.4  %              30.9  %

Operating expenses                      226,728              212,425             21,188              674              247,916              213,099
Expenses as a % of net sales               11.5  %              11.9  %            23.1  %          13.6  %              12.1  %              11.9  %

Operating income                        399,115              338,084             19,773              502              418,888              338,586
Operating margin                           20.3  %              19.0  %            21.5  %          10.2  %              20.4  %              18.9  %


In our calculation of our base business results, we have excluded the following acquisitions for the periods identified:

                                                             Net
                                     Acquisition        Sales Centers              Periods
Acquired                                Date              Acquired                Excluded
Tri-State Pool Distributors        April 2022                 1            May - June 2022
Porpoise Pool & Patio, Inc.        December 2021              1            April - June 2022
Wingate Supply, Inc.               December 2021              1            April - June 2022
Vak Pak Builders Supply, Inc.      June 2021                  1            April - June 2022 and
                                                                           June 2021
Pool Source, LLC                   April 2021                 1            April - June 2022 and
                                                                           April - June 2021



When calculating our base business results, we exclude sales centers that are
acquired, closed, or opened in new markets for a period of 15 months. We also
exclude consolidated sales centers when we do not expect to maintain the
majority of the existing business and existing sales centers that are
consolidated with acquired sales centers.


We generally allocate corporate overhead expenses to excluded sales centers on
the basis of their net sales as a percentage of total net sales. After 15 months
of operations, we include acquired, consolidated and new market sales centers in
the base business calculation including the comparative prior year period.

The table below summarizes the changes in our sales center count during the
first six months of 2022:

                             December 31, 2021     410
                             Acquired locations      1
                             New locations           5

                             June 30, 2022         416



                                       17
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Net Sales
                                          Three Months Ended
                                               June 30,
                   (in millions)         2022           2021              Change
                   Net sales          $ 2,055.8      $ 1,787.8      $ 268.0       15%



Net sales increased 15% in the second quarter of 2022 on top of net sales of
$1.8 billion and 40% growth in the second quarter of 2021. Base business net
sales in the second quarter of 2022 grew 10% over the same period. Our growth
was largely driven by inflationary product cost increases and strong demand that
boosted sales by 16% in our year-round markets. Volume growth was challenged by
unfavorable weather conditions in our seasonal markets and constrained
conditions in Europe. Heavy rainfall and cooler temperatures, particularly in
the month of April, limited sales in certain of our markets although we observed
improvement through the latter half of the second quarter. We believe that our
results reflect the positive impact of growth in the installed base of pools,
robust demand and heightened consumer interest in enhanced pool customizations,
and we remain confident in our expectation of 17% to 19% sales growth for the
full year of 2022. For more discussion of our expectations for the remainder of
the year, see "Current Trends and Outlook" above.

The following factors impacted our sales (listed in order of estimated magnitude):


•inflationary product cost increases of approximately 10 to 11%;
•5% sales growth from recent acquisitions;
•favorable trends for our products including:
•strong demand for discretionary products, as evidenced by sales growth for
product offerings such as equipment and building materials (see discussion
below);
•market share gains, including those in building materials (see discussion
below);
•increased demand for residential swimming pool maintenance supplies, as the
installed base of pools continues to increase; and
•challenges presented in the second quarter including:
•2% unfavorable impact from currency exchange rate fluctuations and customer
early buys shifted into the first quarter of 2022;
•cooler, wet weather conditions in our seasonal markets (see discussion below);
and
•unfavorable weather conditions and macroeconomic impacts in Europe (see
discussion below).

Higher sales for certain product offerings, such as equipment and building
materials, indicate continued strong demand in traditionally discretionary
areas, such as pool construction, pool remodeling and equipment upgrades. In the
second quarter of 2022, sales of equipment, which includes swimming pool
heaters, pumps, lights, filters and automation, increased 7% compared to the
same period last year, and collectively represented approximately 26% of net
sales for the period. Equipment growth in the quarter was limited by supply
chain constraints and customer early buys shifted into the first quarter of
2022. Sales of building materials grew 22% compared to the second quarter of
2021 and represented approximately 13% of net sales in the second quarter of
2022. Sales of chemicals, representing 12% of total net sales, increased 25%
compared to the second quarter of 2021. The increase in chemical sales was
driven by inflation, improved supply and strong demand for non-discretionary
maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who
service large commercial installations are included in the appropriate existing
product categories, and growth in these areas is reflected in the discussion
above. Sales to retail customers increased 7% in the second quarter of 2022
compared to the second quarter of 2021 and represented approximately 13% of our
net sales for the second quarter of 2022. Certain of our retail customers were
adversely impacted by unfavorable weather conditions in the quarter, hindering
sales growth. Sales to commercial customers increased 23% in the second quarter
of 2022 compared to the second quarter of 2021 and represented approximately 3%
of our net sales for the second quarter of 2022.

Net sales in our seasonal markets (not considering Europe), representing 50% of
our total base business net sales in the second quarter of 2022, increased 9%
compared to the second quarter of 2021. Comparatively, net sales in our
year-round markets, representing 45% of our total base business net sales in the
second quarter of 2022, increased 16% compared to the second quarter of 2021.

                                       18
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Net sales in Europe, representing 5% of our total net sales in the second
quarter of 2022, declined 8% in local currency compared to 31% growth in the
second quarter of 2021. While we estimate that net sales in Europe benefited 10%
from inflationary product cost increases, our results were negatively impacted
by a decline in volume growth driven by macroeconomic uncertainty and poor
weather.

Gross Profit
                                          Three Months Ended
                                               June 30,
                   (in millions)          2022           2021             Change
                   Gross profit       $   666.8       $ 551.7       $ 115.1       21%
                   Gross margin            32.4  %       30.9  %



Gross margin increased 150 basis points to 32.4% in the second quarter of 2022
compared to 30.9% in the second quarter of 2021, reflecting benefits from our
supply chain initiatives, increased pricing and recent acquisitions. Base
business gross margin increased 100 basis points.

Operating Expenses
                                                       Three Months Ended
                                                            June 30,
       (in millions)                                   2022           2021            Change
       Selling and administrative expenses         $   247.9       $ 213.1       $ 34.8       16%

       Operating expenses as a % of net sales           12.1  %       11.9  %



Operating expenses increased 16% in the second quarter of 2022 compared to the
second quarter of 2021, including a 1% benefit from currency exchange rate
fluctuations. As a percentage of net sales, operating expenses increased to
12.1% in the second quarter of 2022 compared to 11.9% in the same period of
2021. Our operating expenses have increased to support our business growth,
including recent acquisitions. Employee-related expenses increased as we expand
our workforce and reward employees through performance-based compensation. Other
incremental operating expense increases related to growth-driven facility and
freight costs, and investments in our digital transformation initiatives.

Interest and Other Non-Operating Expenses, Net


Interest and other non-operating expenses, net for the second quarter of 2022
increased $6.6 million compared to the second quarter of 2021, primarily due to
higher average debt levels between periods. Our average outstanding debt was
$1.6 billion in the second quarter of 2022 versus $376.8 million for the second
quarter of 2021. Our weighted average effective interest rate decreased to 2.0%
from 2.7% for the respective periods.

Income Taxes


Our effective income tax rate was 25.1% for the three months ended June 30, 2022
compared to 22.9% for the three months ended June 30, 2021. We recorded a $1.6
million tax benefit from ASU 2016-09 in the quarter ended June 30, 2022 compared
to a tax benefit of $7.7 million realized in the same period last year. Without
the benefit from ASU 2016-09 in both periods, our effective tax rate was 25.5%
for the second quarter of 2022 and 25.2% for the second quarter of 2021.

Net Income and Earnings Per Share


Net income increased 18% to $307.3 million in the second quarter of 2022
compared to $259.7 million in the second quarter of 2021. Earnings per diluted
share increased 20% to $7.63 in the second quarter of 2022 compared to $6.37 in
the same period of 2021. Without the impact from ASU 2016-09 in both periods,
earnings per diluted share increased 23% to $7.59 in the second quarter of 2022
compared to $6.18 in the second quarter of 2021. See the reconciliation of GAAP
to non-GAAP measures below.

                                       19
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Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021


The following table breaks out our consolidated results into the base business
component and the excluded component (sales centers excluded from base
business):
(Unaudited)                                    Base Business                            Excluded                                 Total
(in thousands)                               Six Months Ended                       Six Months Ended                       Six Months Ended
                                                 June 30,                               June 30,                               June 30,

                                         2022                 2021                2022              2021               2022                 2021
Net sales                           $ 3,292,100          $ 2,840,676          $ 176,368          $ 7,903          $ 3,468,468          $ 2,848,579

Gross profit                          1,039,122              850,948             74,872            1,869            1,113,994              852,817
Gross margin                               31.6  %              30.0  %            42.5  %          23.6  %              32.1  %              29.9  %

Operating expenses                      420,655              383,710             38,727            1,490              459,382              385,200
Expenses as a % of net sales               12.8  %              13.5  %            22.0  %          18.9  %              13.2  %              13.5  %

Operating income                        618,467              467,238             36,145              379              654,612              467,617
Operating margin                           18.8  %              16.4  %            20.5  %           4.8  %              18.9  %              16.4  %


In our calculation of base business results, we have excluded the following acquisitions for the periods identified:

                                                                                            Net
                                                             Acquisition               Sales Centers                     Periods
Acquired                                                         Date                     Acquired                       Excluded
Tri-State Pool Distributors                              April 2022                          1                 May - June 2022
Porpoise Pool & Patio, Inc.                              December 2021                       1                 January - June 2022
Wingate Supply, Inc.                                     December 2021                       1                 January - June 2022
Vak Pak Builders Supply, Inc.                            June 2021                           1                 January - June 2022 and June
                                                                                                               2021
Pool Source, LLC                                         April 2021                          1                 January - June 2022 and
                                                                                                               April - June 2021
TWC Distributors, Inc.                                   December 2020                       10                January - February 2022 and
                                                                                                               January - February 2021


For a more detailed explanation of how we calculated base business results and a summary of the changes in our sales centers since December 31, 2021, please refer to the discussion under the heading Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021.

                                       20
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Net Sales
                                           Six Months Ended
                                               June 30,
                   (in millions)         2022           2021              Change
                   Net sales          $ 3,468.5      $ 2,848.6      $ 619.9       22%



Net sales for the first six months of 2022 increased 22% compared to the same
period last year. Base business net sales increased 16%. Our results in the
first half of the year were driven by continued strong demand for outdoor living
products and elevated price inflation. While we have been challenged by supply
chain and labor constraints, we have observed improvements in our supply chain
dynamics beginning in the second quarter of 2022. Following our astounding 33%
sales growth in the first quarter of 2022, results in our seasonally significant
second quarter were dampened by unfavorable weather conditions in certain
markets. We expect that our results will continue to benefit from favorable
industry trends in the long-term, including growth in the installed base of
pools, robust demand and heightened consumer interest in enhanced pool
customizations.

The following factors impacted our sales (listed in order of estimated magnitude):


•inflationary product cost increases of approximately 10% to 11% (compared to
our historical average of 1% to 2%);
•favorable trends for our products including:
•strong demand for discretionary products, as evidenced by sales growth for
product offerings such as equipment and building materials (see discussion
below);
•market share gains, including those in building materials (see discussion
below);
•increased demand for residential swimming pool maintenance supplies, as the
installed base of pools continues to grow;
•6% sales growth from recent acquisitions;
•1% sales growth from an extra selling day in the first half of 2022 compared to
the first half of 2021; and
•challenges presented in 2022 including:
•1% unfavorable impact from currency exchange rate fluctuations;
•cooler, wet weather conditions in our seasonal markets (see discussion below);
and
•unfavorable weather conditions and macroeconomic impacts in Europe (see
discussion below).

Higher sales for certain product offerings, such as equipment and building
materials, indicate continued strong demand in traditionally discretionary
areas, such as pool construction, pool remodeling and equipment upgrades. In the
first six months of 2022, sales of equipment, which includes swimming pool
heaters, pumps, lights, filters and automation, increased approximately 12%
compared to the same period last year. Equipment collectively represented 27% of
net sales in the first six months of 2022. Sales of building materials grew 25%
compared to the first six months of 2021 and represented approximately 13% of
net sales in the first six months of 2022. Sales of chemicals, representing 11%
of total net sales, increased 35% compared to the first six months of 2021. The
increase in chemical sales was driven by inflation, improved supply and strong
demand for non-discretionary maintenance products.

Sales to specialty retailers that sell swimming pool supplies and customers who
service large commercial installations are included in the appropriate existing
product categories, and growth in these areas is reflected in the discussion
above. In the first six months of 2022, sales to retail customers increased 13%
compared to the first six months of 2021 and represented approximately 12% of
our consolidated net sales. Certain of our retail customers were adversely
impacted by unfavorable weather conditions in the second quarter, hindering
sales growth. Sales to commercial customers increased 27% in the first six
months of 2022 compared to the first six months of 2021 and represented
approximately 4% of our consolidated net sales in the first six months of 2022.

Net sales in our seasonal markets (not considering Europe), representing 47% of
our total base business net sales in the first half of 2022, increased 16%
compared to the first half of 2021. Comparatively, net sales in our year-round
markets, representing 48% of our total base business net sales in the first half
of 2022, increased 20% compared to the first half of 2021.

Net sales in Europe, representing 5% of our total net sales in the first half of
2022, were flat in local currency compared to 49% growth in the first half of
2021. While we estimate that net sales in Europe benefited 10% from inflationary
product cost increases, our results were negatively impacted by a decline in
volume growth driven by macroeconomic uncertainty and poor weather.
                                       21
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Gross Profit
                                           Six Months Ended
                                               June 30,
                   (in millions)          2022           2021             Change
                   Gross profit       $ 1,114.0       $ 852.8       $ 261.2       31%
                   Gross margin            32.1  %       29.9  %


Gross margin improved 220 basis points to 32.1% in the six months ended June 30, 2022 compared to 29.9% in the first six months of 2021. This improvement reflects focused supply chain management initiatives to address inflation, increased pricing and benefits from our recent acquisitions.


Operating Expenses
                                                        Six Months Ended
                                                            June 30,
        (in millions)                                  2022          2021            Change
        Selling and administrative expenses         $ 459.4       $ 385.2       $ 74.2       19%

        Operating expenses as a % of net sales         13.2  %       13.5  %



Operating expenses for the six months ended June 30, 2022 increased 19% compared
to the first six months of 2021, including a 1% benefit from currency exchange
rate fluctuations. Our operating expenses have increased to support our business
growth, including recent acquisitions. Our expense growth reflects increases in
growth-driven labor, facility and freight costs, along with increased
investments in technology and higher performance-based compensation.

Interest and Other Non-Operating Expenses, Net


Interest and other non-operating expenses, net for the first six months of 2022
increased $9.2 million compared to the same period last year, primarily due to
higher average debt levels between periods. Our average outstanding debt was
$1.4 billion for the first six months of 2022 versus $387.1 million for the same
period of 2021. Our weighted average effective interest rate decreased to 1.8%
from 2.5% for the respective periods.

Income Taxes


Our effective income tax rate was 24.1% for the six months ended June 30, 2022
compared to 22.6% for the six months ended June 30, 2021. We recorded a $8.9
million, or $0.22 per diluted share, tax benefit from ASU 2016-09 in the six
months ended June 30, 2022 compared to a $11.7 million, or $0.29 per diluted
share, tax benefit in the same period of 2021. Without the benefits from ASU
2016-09, our effective tax rate was 25.5% for the six months ended June 30, 2022
and 25.2% for the six months ended June 30, 2021.

Net Income and Earnings Per Share


Net income increased 36% to $486.5 million for the six months ended June 30,
2022 compared to the six months ended June 30, 2021. Earnings per diluted share
increased 37% to $12.03 for the six months ended June 30, 2022 versus $8.78 per
diluted share for the six months ended June 30, 2021. Without the impact from
ASU 2016-09 in both periods, earnings per diluted share increased 39% to $11.81
for the six months ended June 30, 2022 compared to $8.49 for the six months
ended June 30, 2021. See the reconciliation of GAAP to non-GAAP measures below.


                                       22
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Reconciliation of Non-GAAP Financial Measures

Adjusted Diluted EPS

We have included adjusted diluted EPS, a non-GAAP financial measure, as a supplemental disclosure, because we believe this measure is useful to investors and others in assessing our period-to-period operating performance.

Adjusted diluted EPS is a key measure used by management to demonstrate the impact of tax benefits from ASU 2016-09 on our diluted EPS and to provide investors and others with additional information about our potential future operating performance to supplement GAAP measures.


We believe this measure should be considered in addition to, not as a substitute
for, diluted EPS presented in accordance with GAAP, and in the context of our
other disclosures within this Form 10-Q. Other companies may calculate this
non-GAAP financial measure differently than we do, which may limit its
usefulness as a comparative measure.

The table below presents a reconciliation of diluted EPS to adjusted diluted
EPS.

         (Unaudited)                         Three Months Ended              Six Months Ended
                                                  June 30,                       June 30,
                                              2022             2021          2022          2021
         Diluted EPS                   $     7.63            $ 6.37      $    12.03      $ 8.78

         ASU 2016-09 tax benefit            (0.04)            (0.19)          (0.22)      (0.29)

         Adjusted diluted EPS          $     7.59            $ 6.18      $    11.81      $ 8.49




                                       23
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Seasonality and Quarterly Fluctuations


Our business is seasonal. In general, sales and operating income are highest
during the second and third quarters, which represent the peak months of both
swimming pool use and installation and irrigation and landscape installations
and maintenance. Sales are lower during the first and fourth quarters. In 2021,
we generated approximately 60% of our net sales and 69% of our operating income
in the second and third quarters of the year.

We typically experience a build-up of product inventories and accounts payable
during the winter months in anticipation of the peak selling season.  Excluding
borrowings to finance acquisitions and share repurchases, our peak borrowing
usually occurs during the second quarter, primarily because extended payment
terms offered by our suppliers typically are payable in April, May and June,
while our peak accounts receivable collections typically occur in June, July and
August.

The following table presents certain unaudited quarterly data for the first and
second quarters of 2022, the four quarters of 2021 and the third and fourth
quarters of 2020. We have included income statement and balance sheet data for
the most recent eight quarters to allow for a meaningful comparison of the
seasonal fluctuations in these amounts. In our opinion, this information
reflects all normal and recurring adjustments considered necessary for a fair
presentation of this data. The results of any one or more quarters are not
necessarily a good indication of results for an entire fiscal year or of
continuing future trends for a variety of reasons, including the seasonal nature
of our business, the recent pandemic-driven increased demand for our products
and the impact of new and acquired sales centers.

(Unaudited)                                                                                                       QUARTER
(in thousands)                                    2022                                                           2021                                                             2020
                                       Second               First                Fourth               Third                Second               First               Fourth              Third
Statement of Income Data
Net sales                          $ 2,055,818          $ 1,412,650          $ 1,035,557          $ 1,411,448          $ 1,787,833          $ 1,060,745          $ 839,261          $ 1,139,229
Gross profit                           666,804              447,189              322,376              441,899              551,685              301,131            239,095              328,698
Operating income                       418,888              235,723              127,891              237,276              338,586              129,031             74,351              148,233
Net income                             307,283              179,261              107,609              184,665              259,695               98,655             59,174              119,098

Balance Sheet Data
Total receivables, net             $   756,585          $   679,927          $   376,571          $   476,150          $   585,566          $   487,602          $ 289,200          $   366,412
Product inventories, net             1,579,101            1,641,155        
   1,339,100            1,043,407              894,654              977,228            780,989              612,824
Accounts payable                       604,225              685,946              398,697              414,156              439,453              634,998            266,753              268,412
Total debt                           1,595,398            1,505,073            1,183,350              362,819              423,116              433,171            416,018              339,934



We expect that our quarterly results of operations will continue to fluctuate
depending on the timing and amount of revenue contributed by new and acquired
sales centers. Based on our peak summer selling season, we generally open new
sales centers and close or consolidate sales centers, when warranted, either in
the first quarter before the peak selling season begins or in the fourth quarter
after the peak selling season ends.

                                       24
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Weather is one of the principal external factors affecting our business. The
table below presents some of the possible effects resulting from various weather
conditions.

Weather                                                 Possible Effects
Hot and dry                                        •    Increased

purchases of chemicals and supplies

                                                        for existing 

swimming pools

                                                   •    Increased 

purchases of above-ground pools and

                                                        irrigation and lawn 

care products


Unseasonably cool weather or extraordinary         •    Fewer pool and irrigation and landscape
amounts
of rain                                                 installations
                                                   •    Decreased 

purchases of chemicals and supplies

                                                   •    Decreased 

purchases of impulse items such as

                                                        above-ground pools 

and accessories

Unseasonably early warming trends in spring/late • A longer pool and landscape season, thus cooling

                                                 positively
trends in fall                                          impacting our sales
(primarily in the northern half of the U.S. and
Canada)

Unseasonably late warming trends in spring/early • A shorter pool and landscape season, thus cooling

                                                 negatively
trends in fall                                          impacting our sales
(primarily in the northern half of the U.S. and
Canada)



Weather Impacts on 2022 and 2021 Results


We observed unfavorable weather conditions in certain markets throughout the
second quarter of 2022. Heavy rainfall and cooler temperatures throughout the
northeastern United States and Canada resulted in slower sales activity and
limited sales growth in the second quarter of 2022. Additionally, results in
Europe continued to be impacted by unfavorable weather conditions. In contrast,
our southern markets benefited from above-average temperatures, particularly in
Texas. In the second quarter of 2021, overall weather conditions favorably
impacted sales growth with the average U.S. temperature in June 2021 being the
hottest on record in 127 years.

Overall, weather conditions in the first quarter of 2022 were less favorable
than weather conditions in the first quarter of 2021. Sales benefited from
above-average temperatures along much of the west and the east coast, although
Texas experienced cooler-than-normal temperatures. In addition, some seasonal
markets had unfavorable weather compared to the first quarter of 2021 when
construction activity started earlier than normal. Similarly, results in Europe
were hindered by unfavorable weather conditions. In the first quarter of 2021,
sales benefited from favorable and generally mild weather conditions throughout
the contiguous United States. In February 2021, Texas experienced the most
costly winter storm event on record for the United States, which damaged many
swimming pools and added to already strong replacement activity.

CRITICAL ACCOUNTING ESTIMATES

We prepare our Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP), which require management to make estimates and assumptions that affect reported amounts and related disclosures. Management identifies critical accounting estimates as:

•those that require the use of assumptions about matters that are inherently and highly uncertain at the time the estimates are made; and

•those for which changes in the estimates or assumptions, or the use of different estimates and assumptions, could have a material impact on our consolidated results of operations or financial condition.

Management has discussed the development, selection and disclosure of our critical accounting estimates with the Audit Committee of our Board. For a description of our critical accounting estimates that require us to make the most difficult, subjective or complex judgments, please see our 2021 Annual Report on Form 10-K. We have not changed any of these policies from those previously disclosed in that report.

                                       25
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Recent Accounting Pronouncements

See Note 1 of "Notes to Consolidated Financial Statements," included in Part I, Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

LIQUIDITY AND CAPITAL RESOURCES


Liquidity is defined as the ability to generate adequate amounts of cash to meet
short-term and long-term cash needs. We assess our liquidity in terms of our
ability to generate cash to fund our operating activities, taking into
consideration the seasonal nature of our business. Significant factors which
could affect our liquidity include the following:

•cash flows generated from operating activities;
•the adequacy of available bank lines of credit;
•the quality of our receivables;
•acquisitions;
•dividend payments;
•capital expenditures;
•changes in income tax laws and regulations;
•the timing and extent of share repurchases; and
•the ability to attract long-term capital with satisfactory terms.

Our primary capital needs are seasonal working capital obligations, debt
repayment obligations and other general corporate initiatives, including
acquisitions, opening new sales centers, dividend payments and share
repurchases. Our primary working capital obligations are for the purchase of
inventory, payroll, rent, other facility costs and selling and administrative
expenses. Our working capital obligations fluctuate during the year, driven
primarily by seasonality and the timing of inventory purchases. Our primary
sources of working capital are cash from operations supplemented by bank
borrowings, which have historically been sufficient to support our growth and
finance acquisitions. We have funded our capital expenditures and share
repurchases in substantially the same manner.

We prioritize our use of cash based on investing in our business, maintaining a
prudent capital structure and returning cash to our shareholders through
dividends and share repurchases. Our specific priorities for the use of cash are
as follows:

•capital expenditures primarily for maintenance and growth of our sales center
network, technology-related investments and fleet vehicles;
•investing in inventory and funding other operating expenses;
•strategic acquisitions executed opportunistically;
•payment of cash dividends as and when declared by our Board;
•repayment of debt to maintain an average total target leverage ratio (as
defined below) between 1.5 and 2.0; and
•repurchases of our common stock under our Board-authorized share repurchase
program.

We focus our capital expenditure plans principally on the needs of our sales
centers, and in recent years have increased our spending on information
technology. We project capital expenditures in 2022 will approximate our
historical average of 1.0% of net sales. Capital expenditures were 0.7% of net
sales in 2021, 0.6% of net sales in 2020 and 1.0% of net sales in 2019 and have
averaged roughly 1.0% of net sales over the past five years.

Sources and Uses of Cash

The following table summarizes our cash flows (in thousands):

                                                   Six Months Ended
                                                       June 30,
                                                  2022          2021
                     Operating activities      $ 28,731      $ 187,228
                     Investing activities       (27,431)       (32,495)
                     Financing activities        64,643       (131,061)



                                       26
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Net cash provided by operations was $28.7 million for the first six months of
2022 compared to $187.2 million for the first six months of 2021. The decrease
in our operating cash flows was driven by federal tax payments of $79.5 million
in 2022, which were allowed to be deferred and included in accrued expenses and
other liabilities at December 31, 2021. Additional impacts relate to
growth-driven working capital outflows, including increased inventory purchases,
which were largely offset by an increase in net income.

Net cash used in investing activities for the first six months of 2022 decreased
compared to the first six months of 2021 due to a decrease in cash used for the
acquisition of businesses of $7.5 million, offset by an increase in capital
expenditures of $2.5 million.

Net cash provided by financing activities increased $195.7 million to $64.6
million for the first six months of 2022 compared to net cash used in financing
activities of $131.1 million for the first six months of 2021. The increase in
cash provided by financing activities reflects a $404.7 million increase in net
debt proceeds, partially offset by a $188.5 million increase in share
repurchases and an increase in dividends paid of $16.6 million.

Future Sources and Uses of Cash

Credit Facility


Our Credit Facility, as amended on December 30, 2021, provides for $1.25 billion
in borrowing capacity consisting of a $750.0 million five-year unsecured
revolving credit facility and a $500.0 million term loan facility. The Credit
Facility includes a $750.0 million revolving credit facility and sublimits for
the issuance of swingline loans and standby letters of credit. The term loans
require quarterly amortization payments aggregating to 20% of the original
principal amount of the loan during the third, fourth and fifth years of the
loan, with all remaining principal due on the Credit Facility maturity date of
September 25, 2026. We intend to continue to use the Credit Facility for general
corporate purposes, for future share repurchases and to fund future growth
initiatives.

At June 30, 2022, there was $566.2 million of revolving borrowings outstanding,
a $500.0 million term loan, a $4.8 million standby letter of credit outstanding
and $179.0 million available for borrowing under the Credit Facility. Currently,
we pay interest on revolving and term loan borrowings under the Credit Facility
at a variable rate based on the one month London Interbank Offered Rate (LIBOR),
plus an applicable margin. The weighted average effective interest rate for the
Credit Facility as of June 30, 2022 was approximately 2.6%, excluding commitment
fees.

Term Facility

Our Term Facility, as amended on October 12, 2021, provides for $185.0 million
in borrowing capacity and matures on December 30, 2026. Proceeds from the Term
Facility were used to pay down the Credit Facility in December 2019, adding
borrowing capacity for future share repurchases, acquisitions and
growth-oriented working capital expansion. The Term Facility is repaid in
quarterly installments of 1.250% of the Term Facility on the last business day
of each quarter beginning in the first quarter of 2020. We classify the entire
outstanding balance as Long-term debt on our Consolidated Balance Sheets as we
intend and have the ability to refinance the obligations on a long-term basis.
The total of the quarterly payments will be equal to 33.75% of the Term Facility
with the final principal repayment, equal to 66.25% of the Term Facility, due on
the maturity date. We may prepay amounts outstanding under the Term Facility
without penalty other than interest breakage costs.

At June 30, 2022, there was $161.9 million outstanding under the Term Facility
with a weighted average effective interest rate of 2.8%. We pay interest on
borrowings under the Term Facility at a variable rate based on the one month
LIBOR, plus an applicable margin.

Receivables Securitization Facility


Our two-year accounts receivable securitization facility (the Receivables
Facility) offers us a lower-cost form of financing. Under this facility, we can
borrow up to $350.0 million between April through June and from $175.0 million
to $315.0 million during the remaining months of the year. The Receivables
Facility matures on November 1, 2023. We classify the entire outstanding balance
as Long-term debt on our Consolidated Balance Sheets as we intend and have the
ability to refinance the obligations on a long-term basis.

                                       27
--------------------------------------------------------------------------------

The Receivables Facility provides for the sale of certain of our receivables to
a wholly-owned subsidiary (the Securitization Subsidiary). The Securitization
Subsidiary transfers variable undivided percentage interests in the receivables
and related rights to certain third-party financial institutions in exchange for
cash proceeds, limited to the applicable funding capacities. Upon payment of the
receivables by customers, rather than remitting to the financial institutions
the amounts collected, we retain such collections as proceeds for the sale of
new receivables until payments become due.

The Receivables Facility contains terms and conditions (including representations, covenants and conditions precedent) customary for transactions of this type. Additionally, an amortization event will occur if we fail to maintain a maximum average total leverage ratio (average total funded debt/EBITDA) of 3.25 to 1.00 and a minimum fixed charge coverage ratio (EBITDAR/cash interest expense plus rental expense) of 2.25 to 1.00.

At June 30, 2022, there was $350.0 million outstanding under the Receivables Facility at a weighted average effective interest rate of 2.5%, excluding commitment fees.

Financial Covenants


Financial covenants of the Credit Facility and the Term Facility include
maintenance of a maximum average total leverage ratio and a minimum fixed charge
coverage ratio, which are our most restrictive financial covenants. As of June
30, 2022, the calculations of these two covenants are detailed below:

•Maximum Average Total Leverage Ratio. On the last day of each fiscal quarter,
our average total leverage ratio must be less than 3.25 to 1.00. Average Total
Leverage Ratio is the ratio of the trailing twelve months (TTM) Average Total
Funded Indebtedness plus the TTM Average Accounts Securitization Proceeds
divided by the TTM EBITDA (as those terms are defined in the Credit
Facility). As of June 30, 2022, our average total leverage ratio equaled 1.15
(compared to 1.06 as of March 31, 2022) and the TTM average total indebtedness
amount used in this calculation was $1.2 billion.

•Minimum Fixed Charge Coverage Ratio. On the last day of each fiscal quarter,
our fixed charge ratio must be greater than or equal to 2.25 to 1.00. Fixed
Charge Ratio is the ratio of the TTM EBITDAR divided by TTM Interest Expense
paid or payable in cash plus TTM Rental Expense (as those terms are defined in
the Credit Facility). As of June 30, 2022, our fixed charge ratio equaled 12.22
(compared to 12.38 as of March 31, 2022) and TTM Rental Expense was $75.4
million.

The Credit Facility and Term Facility limit the declaration and payment of
dividends on our common stock to a manner consistent with past practice,
provided no default or event of default has occurred and is continuing, or would
result from the payment of dividends. We may declare and pay quarterly dividends
so long as (i) the amount per share of such dividends is not greater than the
most recently publicly announced amount of dividends per share and (ii) our
Average Total Leverage Ratio is less than 3.25 to 1.00 both immediately before
and after giving pro forma effect to such dividends. Under the Credit Facility
and Term Facility, we may repurchase shares of our common stock provided no
default or event of default has occurred and is continuing, or would result from
the repurchase of shares, and our maximum average total leverage ratio
(determined on a pro forma basis) is less than 3.25 to 1.00.

Other covenants in each of our credit facilities include restrictions on our
ability to grant liens, incur indebtedness, make investments, merge or
consolidate, and sell or transfer assets. Failure to comply with any of our
financial covenants or any other terms of our credit facilities could result in,
among other things, higher interest rates on our borrowings or the acceleration
of the maturities of our outstanding debt.

Interest Rate Swaps


We utilize interest rate swap contracts and forward-starting interest rate swap
contracts to reduce our exposure to fluctuations in variable interest rates for
future interest payments on our variable rate borrowings.  Interest expense
related to the notional amounts under all swap contracts is based on the fixed
rates plus the applicable margin on the respective borrowings.

As of June 30, 2022, we had three interest rate swap contracts in place and two
forward-starting interest rate swap contracts, each of which has the effect of
converting our exposure to variable interest rates on our variable rate
borrowings to fixed interest rates. For more information, see Note 4 of "Notes
to Consolidated Financial Statements" included in Part I, Item 1 of this Form
10-Q.


                                       28
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Compliance and Future Availability


As of June 30, 2022, we were in compliance with all material covenants and
financial ratio requirements under our Credit Facility, our Term Facility and
our Receivables Facility. We believe we will remain in compliance with all
material covenants and financial ratio requirements throughout the next twelve
months. For additional information regarding our debt arrangements, see Note 5
of "Notes to Consolidated Financial Statements," included in Part II, Item 8 of
our 2021 Annual Report on Form 10-K, as updated by Note 5 of "Notes to
Consolidated Financial Statements," included in Part I, Item 1 of this Form
10-Q.

We believe we have adequate availability of capital to fund present operations
and the current capacity to finance any working capital needs that may arise. We
continually evaluate potential acquisitions and hold discussions with
acquisition candidates. If suitable acquisition opportunities arise that would
require financing, we believe that we would have the ability to finance any such
transactions.

As of July 25, 2022, $422.8 million of the current Board-authorized amount under
our share repurchase program remained available. We expect to repurchase shares
on the open market from time to time depending on market conditions. We plan to
fund these repurchases with cash provided by operations and borrowings under the
above-described credit facilities.


                                       29

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